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Subsequent to the announcement of Thermo Fisher Scientific’s (NYSE:TMO) fourth quarter and fiscal 2010 results on February 2, 2011, revision of estimates among analysts depict a positive trend for both fiscal 2011 and fiscal 2012.

Previous quarter Highlights

Thermo Fisher reported an adjusted EPS of $1.00 in the fourth quarter of fiscal 2010, surpassing both the Zacks Consensus Estimate of 95 cents and the year-ago quarter’s 91 cents. For the full year, the company reported a 17% growth in EPS to $3.57, beating the Zacks Consensus Estimate of $3.52.

The company’s revenue of $2.78 billion during the quarter was in line with the Zacks Consensus Estimate of $2.8 billion and 2% lower than $2.84 billion in the fourth quarter of fiscal 2009. While acquisitions had a positive impact of 2% on revenues, unfavorable currency movement had a negative impact of 1%. For fiscal 2010, Thermo Fisher recorded a 7% growth in revenues to $10.79 billion, almost in line with the Zacks Consensus Estimate of $10.80 billion.

The decline in fourth quarter revenue was expected due to the termination of the Biosite contract, difficult flu comparison and fewer calendar days. Despite a decline in revenues, Thermo Fisher’s EPS increased because of improvement in both gross and operating margins, 33% lower interest expense and a 5.5% decline in the share count.

Estimate Revision Trends

We believe that having been encouraged by the various strategies adopted by Thermo Fisher and a gradual improvement in its end markets, analysts are bullish about the company’s performance for both fiscal 2011 and 2012. Out of 16 analysts covering the stock, 13 have raised their estimates for fiscal 2011 in the past 30 days with only 1 doing the reverse. A similar trend can be witnessed for fiscal 2011 with 11 analysts raising their estimates in the past 30 days with no movement in the opposite direction.

However, the situation is a bit different for the first quarter of fiscal 2011 as 6 analysts have reduced their estimates in the past 30 days with 1 upward revision. This is because the first half of 2011 will face difficult comparison as a result of the termination of the Biosite contract and stimulus revenue received from Japan.

Thermo Fisher’s adjusted operating margin improved by 310 basis points to 17.8% in 2010 from 2006. This was possible due to the adoption of Practical Process Improvement (PPI) program, tight cost control on discretionary spending and infrastructure optimization that included reduced footprint and expanded low-cost region (LCR) manufacturing (China, Mexico and Eastern Europe). Revenue from LCR locations in 2010 was $480 million which is expected to cross $550 million in 2011.

Thermo Fisher has strong international operations and derived 40% of its revenues in fiscal 2010 from the international market. Within the Asian market, the company is focusing on China and India, both of which recorded more than 20% growth in the fourth quarter. During the quarter, China became the company’s third largest country in terms of revenue behind the US and Germany. Thermo Fisher views strong potential in China based on rapid industrialization, increasing focus on healthcare, new BioPharma R&D centers and government sponsored research.

The company also plans to expand its commercial operations in Brazil, which is the eighth largest economy in the world. Subsequent to its decision to acquire Dionex (NASDAQ:DNEX), revenue contribution from emerging markets should increase based on Dionex’s high exposure in these regions.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for the next two quarters has been modest. In the past 30 days, estimate for the first quarter has dropped by 2 cents to 92 cents while estimate for the second quarter of 2011 has gone up by a penny. Moreover, estimates for fiscal years 2011 and 2012 have increased by 7 cents to $4.09 and 11 cents to $4.50, respectively, in the past 30 days.

Recommendation

A gradual improvement in the economic scenario along with its focus on potential markets and other strategies should drive Thermo Fisher’s top line in the forthcoming period. Moreover, the company’s strong cash position should assist in making suitable acquisitions, reduce debt burden or repurchase shares. As a result, the Zacks #2 Rank (Buy) is based on the near-term outlook of the company.

Although economic recovery is reflected through improved performance, the company still witnesses pricing pressure, though modest. Moreover, economic turbulence could negatively impact the company’s sales due to financial constraints and customers deferring their buying decisions. Weighing these factors, over the long term, we are “Neutral” on the stock.

Source: Earnings Scorecard: Thermo Fisher Scientific

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